Monday, December 22, 2008

US Housing Bubble Stoked By '97 Tax Cut

Source : The Business Times, December 22, 2008


(NEW YORK) Ryan Wampler had never made much money selling his own homes.

Starting in 1999, however, he began to do very well. Three times in eight years, Mr Wampler - himself a home builder and developer - sold his home in the Phoenix area, always for a nice profit. With prices in Phoenix soaring, he made almost US$700,000 on the three sales.

And thanks to a tax break proposed by then-President Bill Clinton and approved by Congress in 1997, he did not have to pay tax on most of that profit. It was a break that had not been available to generations of Americans before him. The benefits also did not apply to other investments, be they stocks, bonds or stakes in a small business.

Those gains were all taxed at rates of up to 20 per cent.

The different tax treatments gave people a new incentive to plough ever more money into real estate, and they did so. 'When you give that big an incentive for people to buy and sell homes,' said Mr Wampler, 'they are going to buy and sell homes.'

By itself, the change in the tax law did not cause the housing bubble, economists say. Several other factors - a relaxation of lending standards, a failure by regulators to intervene, a sharp decline in interest rates and a collective belief that house prices could never fall - probably played larger roles.

But many economists say that the law had a noticeable impact, allowing home sales to become tax-free windfalls. A recent study of the provision by an economist at the Federal Reserve suggests that the number of homes sold was almost 17 per cent higher over the last decade than it would have been without the law.

Vernon Smith, a Nobel laureate and economics professor at George Mason University, has said that the tax law change was responsible for 'fuelling the mother of all housing bubbles'.

The provision - part of a sprawling Bill called the Taxpayer Relief Act of 1997 - exempted most home sales from capital gains tax. The first US$500,000 in gains from any single-home sale was exempt from tax for a married couple, as long as they had lived in the home for at least two of the previous five years. (For singles, the first US$250,000 was exempt.)

Mr Wampler said that he never sold a home simply because of the law's existence, but it played a role in his decisions and also became part of his stock pitch to potential customers who were considering buying the homes he was building in the desert. He would point out that the tax benefits would increase their returns on a house, relative to stocks.

During the boom years, he prospered. But today he owns 32 hectares of land on the outskirts of Phoenix that he cannot sell. He owes US$8 million to his banks, which may soon foreclose on his land.

The change in the tax law had its roots in a Chicago speech that Bob Dole, Mr Clinton's Republican opponent in the 1996 presidential election, gave on Aug 5 of that year. Trailing Mr Clinton in the polls, he came out for an enormous tax cut, including an across-the-board reduction in the capital gains tax.

The proposal made Mr Clinton's political advisers more nervous than almost anything else during the campaign. The campaign's chief spokesman, Joe Lockhart, travelled to Chicago to stand outside the ballroom where Mr Dole was speaking and make the case that the Dole tax cut would cause the deficit to soar. At the same time, Mr Clinton's aides began scrambling to come up with their own tax proposal. Getting rid of capital gains on most home sales seemed like the perfect idea.

Treasury officials had become interested in that provision earlier in Mr Clinton's term after Jane Gravelle, an economist at the Congressional Research Service, had called it to their attention, according to Eric Toder, an official in the tax policy office at the time. He and his colleagues were looking for ways to simplify the tax code, and Ms Gravelle told them that eliminating capital gains taxes on houses was an excellent candidate.

Three weeks after Mr Dole's speech, with support from top Treasury officials, the proposal had made it into Mr Clinton's speech at the Democratic convention. During the presidential debates that followed, he used it to parry Mr Dole's calls for a big tax cut. The following summer, he signed the provision into law. -- NYT

Economist Sees Even Chance Of A US Depression

Source : The Business Times, December 22, 2008

(WASHINGTON) The US economy has a 50 per cent chance of falling into a depression over the next three years, said Roger Farmer, a member of the National Bureau of Economic Research's economic fluctuations and growth programme.

'There's a significant probability that things will get worse,' Dr Farmer, 53, said during a phone interview last week. 'We're certainly not at the end of the recession and things are getting worse.'

A drop in the Conference Board's index of leading indicators, released last Friday, underscores economists' expectations that the recession would be the longest in the post-war era as banks restrict credit, home and stock values plunge, and job losses mount.

Dr Farmer, who is also graduate vice-chair of the economics department of the University of California at Los Angeles, is predicting that the US recession would last at least another year. 'Everything depends on business confidence, and what I see is declining confidence.'

The loss of confidence is leading households and companies to undervalue assets, which in turn is hurting consumer spending and investment, he said. A government fiscal stimulus programme will have a 'questionable' immediate effect on consumption and financial markets, Dr Farmer said. Instead, he supports the idea of letting the Federal Reserve or government step into the stock market by buying indexed securities such as those linked to the Standard & Poor's 500 Index.

'I don't think anything from historic episodes suggests that, left to itself, the economy is going to magically recover and come back to full employment,' he said. 'Certainly, economies can occasionally stagnate and we should be concerned that that could potentially happen again.'

Employers cut 533,000 jobs from payrolls in November for a total loss so far this year of 1.9 million, which more than erases last year's gain of 1.1 million. The unemployment rate, now at 6.7 per cent, may go above 10 per cent and 'potentially stay there for a while', Dr Farmer said.

The NBER's economic fluctuations and growth programme focuses on the US economy. The programme includes the Business Dating Committee, which officially marks the beginning and end of recessions and expansions. -- Bloomberg

IMF Chief Fears Deeper Slowdown Next Year

Source : The Business Times, December 22, 2008

(LONDON) International Monetary Fund chief Dominique Strauss-Kahn said a lack of fiscal stimulus by governments to tackle the global slowdown may make a bad 2009 even worse, according to an interview released yesterday.

Mr Strauss-Kahn told BBC radio that the IMF may need to cut its next economic growth forecasts, due in January, referring to '2009 as really being a bad year'.

'I'm specially concerned by the fact that our forecast, already very dark . . . will be even darker if not enough fiscal stimulus is implemented,' he said in an interview.

The IMF has called for fiscal stimulus - higher government spending and temporary tax cuts - worth US$120 trillion, or 2 per cent of global annual economic output, to fill the gap caused by slumping private demand following the credit crunch.

Britain has announced fiscal stimulus worth around one per cent of output, and despite a 'disturbing' level of public debt, Mr Strauss-Kahn said more public borrowing would be the lesser of two evils.

'The question of having social unrest has been highlighted by journalists . . . but it's only part of the problem,' he said. 'The problem is that the whole society is going to suffer.'

'The threat is that big today that I think that between two different problems, increasing deficit - which is never good - and fighting against recession - which is even worse - we have to choose the less bad solution,' he said.

He dismissed recent criticism of higher government borrowing by German Finance Minister Peer Steinbrueck and European Central Bank president Jean-Claude Trichet, saying both men had traditionally taken a strong stance against heavy government borrowing.

Mr Strauss-Kahn said help was unlikely to come from further global interest rate cuts - or even a move to so-called quantitative easing, where central banks try to increase the volume of credit in the economy. -- Reuters

Firms Shelve Supply Of 1,000 New Apartments

Source : The Business Times, December 22, 2008

Project development deferred; en bloc properties return to rental market

At least 1,000 projected new apartment units can be expected to be withdrawn from immediate supply in Singapore's property market, as properties that were sold en bloc in recent years are put back on the market for rental.

The latest of these is Lucky Tower at Grange Road which was bought by City Developments Ltd (CDL) in May 2006.

Still standing: Lucky Tower has been leased to a master tenant that intends to sub-let the 91 units

A CDL spokesman said that the entire development of 91 units has been leased to a master tenant that intends to sub-let the units.

According to data complied by Savills Singapore, Lucky Tower was expected to be redeveloped into a 178-unit condominium. However, with redevelopment pushed back, these units are not expected to come on to the market anytime soon.

Another development, the 192-unit The Grangeford at Leonie Hill, acquired by OUE in 2007, has also been put back on the rental market.

OUE is controlled by the Lippo Group and Malaysian tycoon Ananda Krishnan. Lippo Realty executive director Thio Gim Hock said that approximately 70 per cent of the units have already been leased, mainly to expatriates.

On why it decided to defer redevelopment, Mr Thio said: 'The market does not look good for this year or the next.'

It is understood that asking rents for The Grangeford start at about $3,500 for 1,110 square foot two-bedroom units and about $4,500 for a 1,700 sq ft three-bedroom unit.

The Pontiac Land Group has also started to lease out Pin Tjoe Court, which it acquired in September 2006. Senior vice-president (residential leasing) William Teh said that it expects to redevelop the site next year. 'Till then, we are offering very short-term leases, and this is not representative of typical rental in the market,' he added.

Frasers Centrepoint said that Flamingo Valley, which it acquired in early 2007, has been put on the rental market with close to 60 per cent of the 185 units leased out.

Other en bloc developments back on the rental market include Furama Towers, Fairways Condominium, Sophia Court, and Lincoln Lodge.

The increasing number of en bloc sites put back on the rental market is expected to further depress already weakening rentals.

Referring to this 'hidden leasing supply', Japanese investment house Nomura said: 'The move by developers to return en bloc units back to the leasing market to cover to a degree of the holding costs is not unanticipated.'

In the case of Grangeford, assuming a gross rent of $3.40 psf for the 396,483 sq ft apartment block, Nomura estimates that it could secure net income of $14.6 million, equating to a 2.3 per cent yield over its $625 million acquisition price, 'providing some relief to covering the site's holding costs'.

Regardless of 'hidden leasing supply', rentals are already expected to fall. Still, Knight Frank director (research and consultancy) Nicholas Mak believes that the 'hidden supply' of leasing units will not make much of a dent on the rental market. For starters, he notes, many of these en bloc developments have already reached a state of disrepair.

Pointing out that the 108-unit Fairways is about 10 per cent leased, he says that many of the units have been 'stripped bare'.

He also noted that these units have short leases and tenants may be given only one-month's notice to vacate.

Another consequence of deferred en bloc redevelopment is the impact this has on future supply.

Savills Singapore estimates that based on the en bloc deals between 2005 and 2007, over 23,000 new units could be added to the market.

But, as Nomura notes, supply has been increasingly pushed to 2012. As at the third quarter of this year, it found that some 16,762 units are scheduled for completion in 2012, versus the previous quarter's estimate of 14,179 units.

Based on an analysis of official data since Q499, it also found that actual completions lagged behind forecast completions.

The Urban Redevelopment Authority (URA) has also clarified that while developments are deemed 'under construction' in its database, this does not necessarily mean construction has begun.

A spokesman for URA said that it considers a project to be 'under construction' once the Building and Construction Authority records indicate that a project has been issued a permit to commence structural works.

As at Q308, there are 10,007 units under construction. URA said: 'As developers do not have to inform the government of actual ground-breaking after obtaining the permit to commence structural works, URA does not have information on the number of units, expected to be completed in 2009, which have actually broken ground.'

However, it added that it understands that actual construction for a project typically begins within 1-3 months after the developer obtains the permit to commence structural works for the project.

The number of developments that could be deferred will remain unknown. CB Richard Ellis executive director Jeremy Lake pointed out: 'Even if the property has been demolished, a meaningful number of projects will be delayed as construction costs are expected to fall over the next 18 months.'